October 2011

31 October 2011

When I posted my first comment on this subject on this blog and said I was a climate change sceptic I acknowledged that it was a dangerous thing for me to do. As expected, I have come in for criticism from some of those posting comments, and from others. Much of this criticism uses the language I predicted in that post: I am described by many critics as a climate change ‘denier’. This shows the nature of the approach of much of the climate change lobby.

Firstly, they asserted that the science on this matter was settled. When a number of scientists pointed out that this was not so, they have moved onto the language of religion. Climate change for many of them has become a belief and anyone, like me, who still required proof was a denier-someone who refused to accept a belief or assertion.

I was told in a recent comment on my blog that ‘It has been agreed by 99% of climatologists that global warming is man made.’. I asked the person who posted the comment where the 99% number came from (I could equally have asked for the evidence of global warming, let alone the man made assumption) but have yet to receive a reply. Even if this were correct, which I doubt, the number of sceptics/deniers in the scientific community just gained one rather important public addition.

Last week Professor Richard Muller, of Berkeley University in California, and his colleagues from the Berkeley Earth Surface Temperatures project team (BEST) published a paper claiming to have shown that the planet has warmed by almost a degree centigrade since 1950 and is warming continually. The findings were reported uncritically by BBC, The Independent, The Guardian, and The Economist, and The Washington Post said the BEST study had ‘settled the climate change debate’ and showed that anyone who remained a sceptic was committing a ‘cynical fraud’.

But yesterday’s Mail on Sunday revealed that a leading member of Muller’s team - Professor Judith Curry - has accused him of trying to mislead the public by hiding the fact that BEST’s research shows global warming has stopped. Curry states that the project’s research data show there has been no increase in world temperatures since the end of the Nineties and now Muller has admitted that the BEST data suggested that world temperatures have not risen for about 13 years.

Others have also found misgivings in the BEST paper - http://thegwpf.org/the-observatory/4230-best-confirms-global-temperature-standstill.html. “Indeed Best seems to have worked hard to obscure it. They present data covering more almost 200 years is presented with a short x-axis and a stretched y-axis to accentuate the increase. The data is then smoothed using a ten year average which is ideally suited to removing the past five years of the past decade and mix the earlier standstill years with years when there was an increase. This is an ideal formula for suppressing the past decade’s data.”

I wonder if The Washington Post stands by its editorial now? As the BEST report has shown, there is a serious debate still to be had and we should not be afraid to have it.

27 October 2011

This morning I was interviewed on the BBC Radio 4 Today Programme. Twenty five years ago today, the Big Bang completely changed the face of British finance. Here is what I had to say on the matter (click here to listen to the full clip):

EVAN DAVIS: Well, we go straight to the City now, Simon Jack is there. He’s not in a tent or outside St Paul’s but he’s down there to gauge the market’s reaction.

SIMON JACK: Morning, Evan. Yes…

EVAN DAVIS: Morning Simon.

SIMON JACK: Good morning. I’m on the trading floor of RBC Capital Markets in the City. Initial indications are that the deal has been received positively. Shares in Asia – the Nikkei, for example – up nearly 2% and all indications are that we’ll get a strong opening on financial markets here in Europe when they open at eight o’clock, so a big day for the market.

It’s a big day for another reason as well. Twenty-five years ago today was the ‘Big Bang’, that’s when rules and regulations were stripped away, open outcry was replaced by the banks of screens I can see in front of me now. The Square Mile since then has been a hotbed of financial innovation. I met Terry Smith, the Chief Executive of Tullett Prebon in the City, he’s a veteran of the City and I asked him how life and work here has changed since that day.

TERRY SMITH: It’s become more professional, in most senses at least. People used to get in late, go home early and have a long, often liquid, lunch, now it’s quite an intense working environment. Secondly, the ownership has changed. The City was dominated by partnerships owned by individuals who took unlimited liability often for their actions; and of course, the really big change was that people either acted for clients or they traded on their own account as a principal and they didn’t do both. And that’s the big thing that changed because I think it introduced some quite big conflicts of interest.

SIMON JACK: Do you miss the pre-Big Bang days?

TERRY SMITH: Yes, I think anybody who was there before is bound to have a touch of nostalgia for it. I mean, it was much more of a club and people knew each other and it was a jolly environment. I mean, everybody had a nickname in those days. There was a member of the Stock Exchange who had a Victoria Cross and his brother who had the Military Cross, and his brother’s nickname was ‘The Coward’, and it was just a bit of… a bit of fun, that kind of thing really.

SIMON JACK: Now, we’ve now come inside to one of the City’s well-known restaurants, we’re now heading towards lunchtime. This would have been quite a big part of the day, wouldn’t it?

TERRY SMITH: Yes, it would. Lunch was a very important part of doing business prior to Big Bang. Cheers.

SIMON JACK: Cheers.

TERRY SMITH: And it would have been quite normal for people to be lunching with clients and it would have been quite normal for them to be drinking.

SIMON JACK: Has the fun gone out of it, and how did that happen? Was it the arrival of American, more professional organisations, in the ‘80s?

TERRY SMITH: Yes, it was really. The working day expanded; people started earlier. The lunch went out of the window, so to speak, and the trading day just continued to go on. Once people were no longer subject to going on to a floor to trade with each other, they could do it electronically, you’ve got to the point now where people will quite regularly trade on their BlackBerry from home.

SIMON JACK: And 25 years on have things changed for the better?

TERRY SMITH: No, I would say they probably haven’t. There were certainly some things that needed reform - Big Bang - but it basically took away the regulation based upon principles where people knew what was right and wrong and didn’t need a rule book and it took away people acting in the interest of customers, people started to act for their organisation trading against the customers.

SIMON JACK: And ‘twill ever be thus?

TERRY SMITH: Yes, I think it will ever be thus unless you go back to a world in which you just had a set of very loose principles and you have a wise man or woman at the top. The thing that used to exist before Big Bang was the Governor’s eyebrow. If the Bank of England Governor in a meeting with you raised his eyebrow when discussing what you were doing that was enough to make you stop.

SIMON JACK: Both eyebrows raised at the moment I think.

TERRY SMITH: I would think the Bank of England Governor is in danger of getting into the position of the boy with the chemistry set who blows both eyebrows off in the lie of events.

Last night I appeared as a guest on the BBC programme ‘Newsnight’ presented by Jeremy Paxman. We discussed the EU summit talks in Brussels. Here is what I had to say:

Jeremy Paxman:Are you going to be pacified by the markets backing off?

Terry Smith: The peripheral countries are still all falling short of their deficit reduction. It’s quite clear that Greece has defaulted and will go further into default, and that some of the countries will have to leave the currency to recover.

JP: The banks have to agree on recapitalising, and they haven’t agreed, have they?

TS: But it’s not just that the banks have to agree. There’s the other point: where’s the capital going to come from? It’s just an expression of wishes. The only place the capital is ever going to come from is the governments who are putting this forward, who are already too heavily indebted, and will be putting more money into the banks. It’s not a solution.

JP:What are your thoughts on bailout?

TS: If you stop somebody on the street outside and explain that you were going to solve this problem of being over-indebted by borrowing more money, they would look at you rather strangely.

JP:What about the idea of forming a non-euro group?

TS: What is the worry about not being part of the euro? It sounds like the people who used to say that when we were being urged to join in the first place. We were told it would be a catastrophe if we didn’t join the euro, whereas the precise opposite would have been true.

JP:Where are we going to be in a year’s time?

TS: In a year’s time, I think that Greece will have defaulted. It's defaulted already. The attempt to defend Greece may make it impossible to defend the position of Portugal, Spain and Italy. Or they may have to go for capital controls like we had in the UK, and we had exchange control before 1979 to stay in there.

JP:What happens if Greece defaults?

TS: all of the euro deposits in Portugal, Spain and Italy are going to get up and leave if they’re allowed to. And that will then cause a domino effect which will be, I’m afraid, very, very bad. So they either have to follow [Greece] out of the euro or they have to put in some capital controls such as we used to have.

24 October 2011

Thursday 27th October is the 25th anniversary of Big Bang. On this day in 1986 the way in which shares were traded in the UK was changed. In particular, there were no longer any fixed commissions for share trading and brokers and market makers were allowed to combine in so-called dual capacity firms.

The background to this was that shares had been traded on the London Stock Exchange which was literally a mutually owned private members club. The members were firms - brokers who dealt with investors and who charged commissions for doing so and jobbers or market makers who provided liquidity for dealing and in return took a spread between the buying and selling price - the bid-offer spread; and the individuals who were principals of those firms, most of which operated as partnerships.

Prior to Big Bang commissions on dealing were fixed: all brokers charged the same rate of commission and did not compete. Investors could therefore not shop around and get the best deal. But at least investors were protected in the sense that the brokers’ relationship with the jobbers was an adversarial one - the broker would try to get the best price obtainable from the jobber when dealing.

This structure had made London increasingly uncompetitive as a venue for share trading, particularly when compared with New York which had its own version of Big Bang, known as May Day as it happened on 1st May 1975 when it scrapped fixed commissions. Trading in large international company shares had begun to migrate to New York because investors could deal more cheaply there.

The Big Bang reforms were negotiated between Trade Secretary Cecil Parkinson and Sir Nicholas Goodison the Chairman of the Stock Exchange.

At Big Bang I was working for the newly formed BZW which Barclays Bank had assembled by acquiring the broker De Zoete & Bevan and the jobber Wedd Durlacher. I was running the Financials desk which analysed and dealt in the shares of banks, insurance companies and property companies. Ironically, I was analysing many of the companies which took part in Big Bang.

Big Bang not only changed commission and allowed brokers and jobbers to combine. At Big Bang we also went from a world in which:

People came into work at 9.30am, went for a long, often liquid lunch, and left at 4.30pm to one in which work started at 7am and lunch became something you ate at your desk.

Client orders were done by a dealer on the Stock Exchange floor to one where share prices were displayed on screens and dealing required only the click of a mouse as the electronic order book replaced the Stock Exchange floor.

Firms dealing in shares were mostly partnerships to one in which they were mostly owned by foreign banks.

In my view Big Bang was a colossal mistake. The basic motivation for it was correct. Fixed commissions were a barrier to competition and London was losing out as a centre for share trading as a result. But Parkinson and Goodison made an incorrect assumption. They correctly foresaw that an end to fixed commissions would lead to a radical cut in commission rates. But they went on to reason that this fall in commission rates would render stockbroking unprofitable. As a result they accepted a quid pro quo that brokers should be allowed to combine with jobbers (to use the jargon, they should switch from being single capacity firms which either did broking or jobbing to dual capacity firms which did both).

This assumption ignored a simple law of economics-elasticity of demand. They failed to recognise that the reduction in commissions would lead to an upsurge in the volume of shares traded.

These Big Bang changes also introduced insuperable conflicts of interest. No longer were investors protected by a broker acting as their agent and trying to get them the best price. Instead they were dealing with integrated firms which maximised profits by giving investors the worst deal they could as they were principals on the other side of every transaction. And these were not the only conflicts of interest which arose from Big Bang. Integrated securities businesses also provided Merger & Acquisition advice to companies - formerly the domain of merchant banks - as well as providing research on those companies’ shares for investors in those shares, trading in those shares as principals and raising equity or lending money to fund the deals. The potential for profit at the expense of investors as a result were manifold.

These conflicts are supposedly policed by so-called Chinese Walls which keep these functions separate within banks but the long line of scandals on both sides of the Atlantic in the securities markets over the past two decades show that this has unsurprisingly proven to be ineffective. A regulatory concept like Chinese Walls is no match for greed.

It may seem inconceivable that any of the Big Bang reforms will ever be repealed but until they are I think we will be condemned to suffer the sort of mistakes, malpractice and calamities which helped to cause the current financial crisis.

I have changed my mind about Big Bang as a result of the events of the Credit Crisis. As John Maynard Keynes famously remarked: ‘When the facts change, I change my mind.’

03 October 2011

This evening I am speaking at a Centre for Policy Studies fringe event in conjunction with Tullett Prebon in Manchester at the Conservative Party Conference called “Be bold for cuts”.

I’ve just been listening to the Chancellor’s Conference speech in which there was much to both agree with and with which to differ.

It was good to hear George Osborne acknowledge ‘You can’t borrow your way out of debt’. This point has yet to register with Ed Balls and the pseudo Keynesians who have not figured out that we are in a debt crisis and that further deficit spending will have less and less effect in stimulating the economy. They ignore Einstein’s maxim that to repeat the same actions and expect a different result is insane.

It was also good to hear him acknowledge that the Government was not willing to increase deficit spending and so gamble with its credibility in financial markets, although it may be a mistake to assume that those markets will continue to allow us the luxury of reducing the deficit as and when it suits us.

I thought his views on interest rates were less sound. ‘Nothing would be more fatal for an economy as indebted as ours than a sharp rise in interest rates.’ He went on to say that ‘because banks are damaged they won’t lend at the current low rates’. This confuses two concepts-whether the banks can raise deposits to lend at these low rates, which they clearly can’t and the damage which has been done to their capital bases and creditworthiness by the crisis. Low rates do not adversely affect banks’ capital or creditworthiness, but since no sane depositor would put money in a bank at the current virtually zero rates, raising rates would help banks to gather deposits and lend them. It is worth bearing in mind that 20 years of low rates do not seem to have done much for the Japanese economy.

George Osborne’s solution to this weak bank lending so-called ‘credit easing’ or government guarantees of some business loans is totally misconceived. If you thought the banks were bad at lending, wait until you see what happens when the government try it.

It was, however, good to hear him say ‘I’m a believer in tax cuts’ even if no meaningful cuts can be forthcoming until the deficit has fallen significantly. The surest way to stimulate an economy is to leave as much money to be spent by those who earned it.

He is right ‘For generations to come, people will say: thank God Britain didn’t join the Euro.’

He was also right that the public sector unions are wrong to strike for pension rights which are more generous than those of their paymasters-those of us who work in the private sector.

But it was disappointing to see the Chancellor join the ranks of the warmists with his statement that ‘climate change is a man made disaster’. Assertion Mr Chancellor is not the same as scientific proof. The taxpayer and business can ill afford more totally irrational subsidies to wind farms, solar power and biodiesel or support for the frankly fraudulent carbon trading scheme. Stick to the day job: make some real cuts, get the deficit down and then cut taxes to stimulate the economy. Leave the weather forecasting to others.